International Research Project Charts Course for Chinese Transition to Unsubsidized Power Market

Last Updated on August 22, 2019, 3:25 AMChina’s National Development and Reform Commission (NDRC), one of the country’s foremost economic agencies, and the National Energy Administration (NEA) is developing ways and means by which China could create spot electricity markets that could make for a more efficient national power market and allocation of investment capital, wean solar and wind power developers off subsidies and at the same time resolve the pressing issue of solar and wind power curtailment.

Pilot electricity spot market systems are being introduced in a handful of Chinese provinces as a means of testing how various market designs impact power generators, how the economics of energy could change, how GDP and jobs may be affected, their potential to meet local and national renewable energy and energy intensity reduction goals, and how best to manage such a transition. The pilot projects are to serve as a prelude, or precursor, to development and implementation of a national spot electricity markets framework that will give authorities at the provincial level the leeway to develop and implement more detailed market rules and regulations customized to meet their provinces’ particular energy needs and resources, Wetzel told Solar Magazine.

Introducing spot electricity markets

The introduction of electricity spot markets is seen as a way that “could greatly improve power plant dispatch, reducing costs and CO2 emissions,” Wetzel and co-author Ruosida Lin wrote in the report’s executive summary.

Understanding these impacts is key to managing stakeholders and finding a politically feasible, balanced way to institute these reforms. Without this, reforms may meet with strong resistance, delay or halt implementation, or force regulators to make concessions that sacrifice cost and emissions reductions.

Other studies have indicated that electricity dispatch determined by spot markets that establish a level playing field for all generators could reduce electricity costs and emissions by as much as 8% today and as much as 12% by 2035 as compared to the dispatch protocol that has been in use since 2015 electricity market reforms were instituted, the authors point out.

The joint research team modeled and analyzed a representative sample of power generators in an unnamed northern province so as to offer provincial regulators examples of the types of criteria and analysis they might find useful when designing electricity spot markets best suited for their particular jurisdictions. Among the key findings, they determined that:

The test area can reduce costs and emissions by 3.6% and 4.4% respectively, largely driven by increased renewable integration and utilizing more efficient power plants. While these reductions are unto themselves substantial, totaling 627 million RMB and 2.12 million tons annually, this is ultimately a conservative estimate assuming no technical changes to power plant operation or inter-provincial exchange. Furthermore, markets are a foundation for cost minimization in the future, especially as more renewables are added in line with China’s latest installation targets. Other analyses have demonstrated up to 12% annual cost and emissions reductions system-wide in China by 2035.

Wholesale electricity prices decrease from current state-set prices due to overcapacity. These prices are too low to keep all current generators profitable and will pressure nonessential generators to exit the market. After these plants exit, prices rise to levels that cover the going-forward costs of remaining generators, around 370 RMB/MWh, only 11.2 RMB/MWh below the benchmark prices of the year were simulated. Even with generator exit, the current reliability standards of the grid can be met. Only small price reductions are passed to customers, an estimated 0.01 RMB/kWh, although it is expected that competition in electricity markets will make generation more efficient, and will, in turn, further pass cost reductions on to customer rates.

Combined heat and power (CHP) represents too great a share of the test area’s generation (81% of installed capacity) to be exempt from market dispatch, as is the current protocol in many ongoing market reforms. CHP must participate in market dispatch, even when meeting heat obligations to place economic pressure on CHP to reduce minimum run rates, thereby enabling cost and emissions reductions to grow beyond the 4% reductions expected from dispatch reform alone. Furthermore, by not having CHP participate in energy spot markets, market prices cannot be set during many hours in heating season, undermining a sustainable market environment.

Shifting to market dispatch does not require additional thermal power plant flexibility; all dispatch efficiencies can be achieved using existing assets without violating any technical constraints, including minimum run rates and ramping rates. Contrary to common perception, market dispatch actually reduces fleet-wide ramping by improving generator scheduling, and keeps the number of startups and shutdowns consistent with current dispatch. Ramping, startups, and shutdowns, however, are now concentrated among a few generators, instead of being spread evenly across the fleet as is done under current dispatch.

Determining the most economic way China could maximize the share of clean energy in its national energy mix as compared to a “business as usual” scenario analysis, the research team concluded that China could reduce the carbon intensity of energy 87% by 2050 as compared to its level in 2005 with GDP growing 600%, a net present value savings of USD3.1 trillion in 2010 dollars, Wetzel highlighted.

Building upon that research, the RMI China Program in 2017 began working with one unspecified Chinese utility think tank on the Energy Spot Markets in China research project. The overarching goal was to chart a pathway to open electricity markets that result in optimal electricity dispatch and renewables integration while at the same time addressing the political issue of easing the exit of uneconomic power generators, Wetzel explained. The Chinese government has a strong economic incentive to wean solar and wind power generators off feed-in-tariff (FiT) subsidies, a situation that has intensified as FiT funds have dried up, Wetzel noted.

The researchers realized that phasing out coal power generator price guarantees and moving towards open, spot electricity markets could reduce solar and wind power curtailment, but doing so would also result in a lot of coal plants being retired, posing a lot in the way of political challenges, Wetzel continued.

We started out by dealing with the political risks, analyzing the hypothetical size of retirement so as to begin to understand the scope and scale of the challenge. Then, we began to deal with the other challenges associated with the design and implementation of spot electricity markets that moved towards a more efficient model of dispatch.

Addressing issues of political economy and technical feasibility

The researchers proceeded to develop a modeling tool that produced a rough estimate of the number of power generators that would exit the market and what the resulting market prices for remaining generators would be given a specific market design for the northern Chinese province.

“One of the major leverage points was leveraging China’s electricity dispatch and market system, more specifically moving from a central system of price guarantees for coal power generators that was instituted in the wake of huge power shortages back in 2002–2005,” Wetzel told Solar Magazine. This system resulted in the most efficient coal power plants built say in 2018 receiving the same compensation as those built in 2005 even though there were huge differences between them in terms of efficiency, overall performance and carbon emissions, he highlighted.

One of the most significant outcomes of the research was a projected reduction in renewable energy-to-grid curtailment from 31% to 17% given the constraints of technical and economic feasibility, Wetzel highlighted. More broadly, implementation of an electricity spot market would result in a huge amount of financial savings, along with an anticipated 10–12% reduction in energy sector carbon emissions by 2030 at the national level, according to a study carried out by the International Energy Agency (IEA), Wetzel pointed out.

“Each province sets its own tariff based on a national tariff guideline,” Wetzel explained. “So that’s where the challenge comes in. In the region we studied, electricity generated as a by-product for heating represented 70% of winter power demand during the coldest months, which leaves just 30% for renewables and other generation resources. That’s why there’s so much curtailment all across northern China.”

Moving solar and wind power generators off subsidies by reducing curtailment could offset the losses project developers would wind up with by losing subsidy payments, as well as reduce greenhouse gas (GHG) emissions and gradually reduce the associated financial burden on the government, according to the research results.

Reducing curtailment could wind up increasing [renewable power generators’] revenues. There wouldn’t be any take or pay contracts and they wouldn’t receive any subsidy payments, but they would wind up being better off than they are given the current, subsidized market environment and rate of curtailment.

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